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Competition in Banking | 1
Competition in banking A collection of essays
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2 | Competition in Banking
Disclaimer: The views expressed in this collection are those of the authors
and do not necessarily refl ect the opinions of New City Agenda.
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Competition in bankingA collection of essays
Contributors: Anders Bouvin, Alex Chisholm, Tony Greenham,
Benny Higgins, Cathy Jamieson, Dominic Lindley, Paul Pester,
Alison Robb, Andre Spicer, Peter Vicary-Smith
Edited by Kawan Patel and Matthew Ball
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4 | Competition in Banking
Acknowledgements: We’d like to thank all our contributors, without whom this collection would
not have been possible. We are also indebted to the time, effort and patience of Simon Alderson,
Tamara Jackson, William McMyn, Matthew Oakley, David Shaw, Gill Street, Adam Treslove, Richard
Wainer, and Richard Winder.
About New City Agenda: New City Agenda is a not-for-profi t fi nancial services think tank and
forum founded by Lord McFall, the Rt Hon David Davis MP, and Lord Sharkey.
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Competition in Banking | 5
Table of Contents
About the contributors .................................................................................................................................................................. 7
Introduction ......................................................................................................................................................................................... 8
Kawan Patel
Essay One ........................................................................................................................................................................................... 11
The role of competition in banking markets
Alex Chisholm
Essay Two ........................................................................................................................................................................................... 17
A golden opportunity: fi xing retail banking
Peter Vicary-Smith
Essay Three ........................................................................................................................................................................................ 25
Competition: the key to better banking in Britain
Paul Pester
Essay Four .......................................................................................................................................................................................... 30
Transparency can help fi x retail banking
Benny Higgins
Essay Five ........................................................................................................................................................................................... 37
Beyond PLC banks: competition through market diversity
Alison Robb
Essay Six ............................................................................................................................................................................................. 42
What competition cannot solve
Tony Greenham
Essay Seven ....................................................................................................................................................................................... 49
Satisfi ed customers deliver competitive advantage
Anders Bouvin
Essay Eight ......................................................................................................................................................................................... 55
Competition is crucial to better banking and a more balanced economy
Cathy Jamieson MP
Essay Nine ......................................................................................................................................................................................... 60
Can fi ntech revolutionise retail banking?
Dominic Lindley
Essay Ten ............................................................................................................................................................................................ 69
Competition is no cure-all for culture
Andre Spicer
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6 | Competition in Banking
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About the contributors
Anders Bouvin is CEO of Handelsbanken UK
Alex Chisholm is CEO of the Competition and Markets Authority
Tony Greenham is Programme Head, Finance and Business, at the New Economics Foundation
Benny Higgins is CEO of Tesco Bank
Cathy Jamieson MP is Shadow Financial Secretary to the Treasury
Dominic Lindley is a consultant and fi nancial services expert
Paul Pester is CEO of TSB Bank
Alison Robb is Group Director, People, Customer, Communication and Commercial
at Nationwide Building Society
Andre Spicer is Professor of Organisational Behaviour at Cass Business School
Peter Vicary-Smith is Group CEO of Which?
Competition in Banking | 7
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8 | Competition in Banking
Introductionby Kawan Patel
Head of Projects, Policy and Communications at New City Agenda
When we released our fi rst report into the culture of British retail banking, one graph generated far more
media attention than we had expected. The graph, which was taken from the Bank of England’s Quarterly
Bulletin in 2010, showed how 16 major banks with combined balance sheets of £8bn (32% of GDP) in
1960 became, through a series of mergers, four big banks with combined balance sheet over £6trn (450%
of GDP) by 2010.
This fascination with the size of Britain’s largest banks, regardless of the issue being discussed, fi tted quite
neatly into a line of thinking we encountered time and again whilst interviewing people as part of our
research; a train of thought which either blamed poor culture on a lack of effective competition, or saw
effective competition as the solution to poor culture.
Debates around access to fi nance, the fair treatment of customers, fi nancial stability (‘too big to fail’),
and sustainable economic growth, often similarly cluster around assessments of the banking sector’s
composition and competitiveness.
Competition, it seems, is the hottest topic in town, and understandably so.
To paraphrase one of our contributors, banking is part of ‘the essential economic infrastructure of
society’; it is ‘a market that really matters’. The competitiveness of the banking sector, in other words,
is everybody’s business.
This essay series explores the state of competition in British retail banking. Our contributors give their
opinions on whether or not the sector is truly competitive; discuss what benefi ts can be derived from
an increase in choice, diversity and transparency; and suggest ways in which the banking market can be
made to function more effectively.
We begin by addressing the elephant in the room, the Competition and Market Authority’s decision to
refer both personal current account and SME retail banking sectors for full market investigations. Alex
Chisholm sets out the CMA’s reasoning behind the decision in our fi rst chapter.
In chapter two, Peter Vicary-Smith outlines what he believes are the key themes and approaches that
should guide the CMA in their inquiry into the personal current account market.
One of these key themes, culture is also addressed by Paul Pester who argues that greater competition
‘is the only way to deliver the kind of banking customers want’ in chapter three.
Pester’s essay also focuses on the importance of transparency, an issue which Benny Higgins claims is
essential to ensuring effective competition in chapter four.
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Competition in Banking | 9
Higgins is critical of the notion that new entrants will automatically bring about better outcomes for
consumers, a scepticism which also runs through Alison’s Robb chapter on the need for a regulatory
framework which takes better account of non-PLC models and encourages greater market diversity.
Diversity is one of the primary themes of chapter six, in which Tony Greenham lists the problems he
believes competition cannot solve.
Anders Bouvin elaborates on Handelsbanken’s belief that a focus on long term relationships and customer
service deliver competitive advantage in chapter seven.
In chapter eight Cathy Jamieson discusses the importance of a competitive banking sector to securing
better standards of service in business and personal banking, and a more balanced economy.
Dominic Lindley examines the prospects for new entrants which are aiming to use technology to disrupt
the retail banking market in chapter nine, and in our fi nal chapter Andre Spicer challenges the assumption
that competition alone will solve all of the sector’s cultural issues.
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Competition in Banking | 11
Last November, the CMA made the decision to launch an in-depth market
investigation into the personal current account and SME retail banking sectors.
That investigation is now being conducted by a group drawn from our panel of
expert members. It’s no part of my role as Chief Executive to interfere with the
independence of their decision-making or to make comments that anticipate
the investigation process. However, in this essay I will discuss our reasons for
referring these markets for a full market investigation, following our ‘fi rst-phase’
analysis in our market studies. I will also outline some of the other ways in
which competition – and the CMA – are relevant to the banking industry.
The role of competition in banking markets
by Alex Chisholm
CEO of the Competition and Markets Authority
ESSAY ONE: Alex Chisholm
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12 | Competition in Banking
For consumers, banking performs a vital service across society. Virtually every household in the country
uses retail banking services. In our market studies published last July, which led to the launch of the market
investigation, we found that in 2013 there were 65 million active personal current accounts in the UK.
Small and medium-sized businesses – SMEs – which employ 60% of the country’s workforce, hold business
current accounts that collectively yielded for the banks £2.5 billion in revenue, and the value of outstanding
term loans to SMEs in Great Britain was some £90 billion. And of course larger corporates depend on the
banking sector for a wide range of fi nancing facilities.
What’s more, banking is of course part of the essential economic infrastructure of our society. As well as
being a major industry in itself, it underpins most other economic activity, both consumer and business.
We’ve calculated from Payments Council fi gures that every day there are 59.1 million payment transactions
going through our banking system. Up and down the country there are (in spite of branch closures) over
8,000 bank branches.
So retail banking is a market that really matters. When there’s vigorous competition in this market, the
economy will benefi t from higher quality and better value banking services. Conversely if competition
is weakened or frustrated – whether through anti-competitive practices by businesses in the market, or
through inherent features of the market – the incentives to offer consumers attractive prices and quality are
correspondingly weakened. The CMA’s role is to ensure that competition is not weakened or frustrated in
these ways, and that incentives to offer consumers attractive prices and high service standards remain high.
The market studies we conducted into personal current accounts and SME banking, published in July, and the
consultation that followed, showed reasonable grounds for suspecting that there were features preventing,
restricting or distorting competition. On that basis, we decided that it was appropriate to refer these sectors
for a full market investigation.
Where there is a vigorously competitive market, the businesses that do the best job of servicing customers –
in terms of price and quality of service – tend to win customers and gain market share. The ones that don’t
can expect to lose customers and market share.
What we found in retail banking was that it didn’t seem to be working like this. For both personal and SME
customers, very limited market share gains have been made in recent years by those banks with the highest
reported levels of customer satisfaction. Conversely, those with some of the lowest satisfaction scores –
relatively – didn’t seem to be losing signifi cant market share as a result. This is not what one would expect
to see in a well-functioning competitive market.
In fact the evidence suggested that market shares had remained remarkably stable over a sustained period.
There were a number of possible factors contributing to this apparently muted competition.
First, there seemed to be relatively little switching and shopping around by consumers – which matters
because the hope of winning customers, and the fear of losing customers, is of course one of the main
drivers to businesses competing vigorously. The new seven-day current account switching service has made
switching easier, but switching levels remain at about 3 or 4% a year – fi gures that compare poorly with
other sectors, including the energy sector.
As for SMEs, a survey conducted for our SME banking market study showed that many are concerned at how
diffi cult it is to compare charges.
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Competition in Banking | 13
Second, there seemed to be considerable barriers to market entry and expansion. Barriers include the
continuing need to maintain an extensive, and costly, branch network in order to be an effective scale
competitor. Although people increasingly use online banking and mobile apps for their banking needs, the
survey evidence we saw showed that both personal and SME customers still very much value having a
branch of their bank near them. And this is refl ected in the banks’ business models: despite all the news of
branch closures, the larger banks intend to maintain very extensive branch networks; and amongst so-called
‘challenger banks’, Metro is establishing a substantial new network of branches. Another possible barrier we
heard about was the suggestion that smaller banks face disproportionate diffi culties and costs in gaining
access to essential payment systems like BACS, CHAPS and Faster Payments.
Our November decision to ask the CMA’s panel of independent members to conduct a full ‘market
investigation’ into retail banking was not a fi nal decision that the market is anti-competitive. It wasn’t,
as it were, a ‘guilty’ verdict. It will be for the panel members running the investigation to decide, at the
end of a thorough and detailed 18-month investigation, whether any features of the relevant markets
have an ‘adverse effect on competition’. If there is such an adverse effect, the panel members can then
require measures to remedy that adverse effect. Those measures could in principle be structural – ordering
businesses to be divested, as happened a few years ago after the market investigation into BAA, which led
to the sell-off of airports in London and Scotland. But there are also other possible remedies if the panel
members conclude that there is an adverse effect on competition – for instance so-called ‘behavioural’
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14 | Competition in Banking
remedies such as requiring greater transparency and comparability – and they could involve regulatory or
legislative changes. All that is not for me, but for the panel of independent members to decide, after they
have heard and assessed all the relevant evidence and arguments from interested parties.
There have been numerous investigations by public bodies into banking – by the Financial Conduct Authority
(FCA), the Treasury, the Bank of England, and our predecessor bodies, the Competition Commission and
the OFT. Plus, of course, the Vickers report in 2011, the Parliamentary Commission on Banking in 2013
and Treasury Select Committee inquiries. And we are fully conscious that a market investigation involves
considerable cost, both for the businesses in the sectors under investigation and for the public purse.
So is there the need for another regulatory intervention?
While I can’t predict the outcome of this market investigation, it’s worth pointing out that, unlike many
of those earlier inquiries, the CMA has powers, following a market investigation, to order remedies to any
adverse effects on competition that might be identifi ed, rather than merely to make recommendations.
What’s more, many of those earlier reports – including Vickers in 2011, and the Parliamentary Commission
in July 2013 – explicitly envisaged that there should be a market investigation by 2015 in the absence of a
transformative change in the conditions of competition in the sector. While we recognise that there have
been important developments – the current account switching service, for example – they don’t seem to
us yet to have had the transformative effect hoped for, and the long-standing concerns about competition
in retail banking largely remain.
So we’re confi dent the decision to launch a full market investigation was well justifi ed. But we will keep
fi rmly in mind the need to avoid unnecessary regulatory burdens.
There is of course more to competition than just market investigations. As part of our duty to promote
competition – which benefi ts consumers and the wider well-being of society – we will seek to combat
anti-competitive practices. Part of that involves enforcing the UK and EU competition prohibitions: the
prohibition on agreements and concerted practices between businesses that restrict competition, and the
prohibition on unilateral abuses of a dominant market position. The prohibition on ‘agreements’ between
businesses that restrict competition can apply even if the agreement isn’t legally binding, and even to the
most informal kind of arrangement or understanding, which may arise from emails or just conversations.
Compliance is essential, and the sanctions for infringements can be severe. Fines for anti-competitive
behaviour can amount to up to 10% of group turnover. And infringements of the prohibitions can have other
harmful consequences. Directors of companies found to have infringed the prohibitions can be disqualifi ed
from holding directorships. Victims of the infringements – for example, customers who are paying higher
charges as a result of the reduction in competition – can sue in court to recover damages for their loss. And
there is the reputational damage: it is not good for business to be investigated and found to have gone down
to customers.
Conclusion
Competition in banking is essential to maximising the benefi ts the sector can bring to consumers in society
and to the wider economy. Although it can sometimes seem otherwise, this needn’t be an antagonistic
process. The competition authorities will come down hard on anti-competitive practices that break the law,
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Competition in Banking | 15
but will work with banks to encourage compliance. The market investigation offers an opportunity
for constructive engagement about improving outcomes for customers. And we will support moves
to remove disproportionate or excessive regulatory requirements that dampen competition. Focused
on the need to serve society by ensuring vigorous competition, we look forward to working with the
banks in these endeavours.
This essay is based on a speech delivered by Alex Chisholm to the British Bankers Association Conference,
on the 4th of December 2014.
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16 | Competition in Banking
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Competition in Banking | 17
Another year, another inquiry into the fi nancial services sector. This time a
full 18-month inquiry by the Competition and Markets Authority (CMA) into
retail banking, including both the personal current account (PCA) and Small
to Medium Enterprise banking markets. This essay focuses on the PCA market
and outlines why this new inquiry is needed. It then sets the scene for how
the CMA should approach some of the problems in the market.
A golden opportunity: fi xing retail banking
by Peter Vicary Smith
Group CEO of Which?
ESSAY TWO: Peter Vicary Smith
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18 | Competition in Banking
The market is important but it isn’t working for consumers
PCAs are an everyday part of life for the vast majority of UK consumers. They are where we get paid, how
we pay the bills and manage our mortgages and, through the use of an overdraft, where we might turn fi rst
to make ends meet in the event of an income shock or particularly expensive month.
Yet despite this clear importance, and plenty of attention from regulators and government, Which? research
has repeatedly demonstrated a complex mix of long-standing problems on both the demand and supply side
that impede genuine competition and are detrimental to consumer outcomes.
On the demand side, consumer engagement in this market remains too weak to truly drive effective
competition: switching rates are low (currently 3.1%)1; and because of complex pricing structures, consumers
are often unable to make informed product comparisons and select the best account for their needs.2
On the supply side, high barriers to entry contribute to high and persistent market concentration. The Big
Four banks control 77% of the PCA market.3 On top of this there is, arguably, a lack of meaningful product
and service innovation. Recent advances in faster payment services and increased switching speeds have
been pushed through with political pressure and there are accusations that incumbent fi rms have used their
dominance of the payment system itself to limit potential challengers’ access to these innovations.4
So what can be done?
Identifying the problems is a relatively easy task. Solutions that can turn around decades of failings are more
complex. The CMA should be guided by Which?’s Six tests of a competitive banking market5. Some key themes
that should run through their inquiry are highlighted below.
There is no (switching) silver bullet
The complexity of problems across the demand and supply side mean that it is unlikely that signifi cant
changes are going to be achieved by implementing one single policy response. There is no silver bullet.
There has recently been a focus on improving the speed and reliability of switching, through the introduction
of the Current Account Switching Service (CASS). Which? supports this initiative: it has the potential to bring
down barriers to switching that consumers previously faced. However, on its own, it will not lead to the
change in engagement needed.
Figures from the Payments Council already show the potential limits of its impact. They show that switching
rates have recently increased, but still stand at a paltry 3.1%6. Nearly six in ten (58%) consumers have never
switched their main current account.7
This means that when thinking about the demand side, it is important that the CMA looks beyond both
the ease with which consumers feel they are able to change suppliers or products and the proportion of
consumers switching. They must pay careful attention to outcomes of any potential switch and consumers’
motivations for engaging in the fi rst place.
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Competition in Banking | 19
Outcomes from (not levels of) switching are important for consumers and competition
For consumers, previous research suggests that outcomes are not always improved by switching. One in
fi ve consumers who switched current account in the last year say they are not currently confi dent they
are on the best value product.8
Outcomes are also important for competition. To understand why, consider a situation where there are two
competing banks and a consumer is looking to switch, but makes a choice based on a coin toss. Here, even
if all consumers switch every year, each bank will receive half of all consumers and there is no incentive for
them to compete based on product offering or price.
This might seem an over-simplistic scenario, but it is easy to see how it could apply to the PCA market.
Which? research shows that:
• The vast array of different overdraft charging structures, makes it extremely diffi cult for consumers to
accurately and easily compare current accounts on the basis of cost;9 and
• Consumer choices are subject to behavioural biases. For instance, rather than systematically approaching
product comparison, consumers sometimes base choices on products appearing close to the top of the
price comparison site or google page. 10
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20 | Competition in Banking
So overall, a combination of price obfuscation and consumers using choice heuristics, might lead to
switching behaviour that is akin to the rolling of a die and little incentive for banks to innovate to meet
real consumer need.
This highlights the importance of progress to make the Midata initiative a reality for consumers. It could help
those switching make choices that more consistently improve their outcomes and, in turn, give incentives
for providers to innovate and more effectively meet consumer needs. The CMA must consider how its own
recommendations can facilitate and support this initiative.
Providing meaningful choice
Even if switching is made easier, quicker and more informed with CASS and the Midata initiative, the impacts
on competition will be muted unless consumers actually want to engage with the market in the fi rst place.
That means that consumers’ motives for switching are important. It is concerning that our research
shows that some consumers tend to switch in response to a bad experience with their existing bank (a push
factor) rather than because they see alternatives in the market that think would better suit their needs
(a pull factor).11
Our research also suggests that consumers do not see tangible differences in the product and service
offerings available from different banks. This impacts on their likeliness to switch. One in three (31%)
consumers agree that “there seem to be no differences between banks; I don’t think I will receive anything
of discernible difference (e.g. in price, quality, service) depending on the one I choose”.12 Our analysis of
the market suggests that recent entrants are unlikely to signifi cantly change this view.13
This should be an area of focus for the CMA. One way to improve product and service differentiation is
to facilitate the entry of challengers into the market. This needs to be done in a way that allows them to
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Competition in Banking | 21
introduce business models, products and services based on meeting consumers’ needs through innovation
and that are tangibly different to what currently exists.
We only need to look at the impact of relatively new entrants to the food retail market to see the potential
here. The recent explosion of Lidl and Aldi has turned this market on its head. Shares in incumbent fi rms
have fallen heavily this year and both fi rms are quickly picking up market share by providing consumers a
distinctly different offering.14
Arguably, this has not been the case with challenger brands in the PCA market over the last decade. In part
hamstrung by the need to access costly and complex payments systems and infrastructure and the need
to compete with the large branch networks of incumbents, product and service offerings have not provided
consumers with brands that they can clearly distinguish. Just one in ten consumers say they see a clear
difference between the banks.15
In this respect, the role of the Payment Systems Regulator (PSR) and their two market studies (on ownership
of payment schemes and indirect access to the payment system) will be important. The CMA must play
a coordinating role to ensure that the actions of the PSR fully support its goal to increase meaningful
competition and improve consumer outcomes.
Cultural change is key
In delivering real choice for consumers, the CMA must also recognise the important role of cultural change
and how this interacts with the potential success of any competition remedies they propose.
In part, a refl ection of the scandals that have plagued the industry, just 26% of consumers trust the sector
to act in their best interests.16
Again, a comparison with the retail market is warranted. In Havas’ recent survey on the role of companies
in society retail was the rated as the most “meaningful” sector, primarily because people feel it helps them
improve and enjoy their lives, and because retail brands focus their communication on these areas. In
contrast, retail banks performed badly across a range of areas including the extent to which:
• They treat me with respect;
• I like to be seen using this brand;
• It helps me save money /manage my spending; and
• It makes interactions with the company easy, enjoyable and convenient.
These fi ndings are also refl ected in the Which? customer service survey. This shows that six of the top
ten brands came from retail but the majority of the UK’s biggest banks and brands (including Natwest,
Santander, HSBC, Co-operative Bank and Barclays) all appeared well into the bottom half of the scores.17
With poor customer service, little or no perceived product or service differentiation and continued news
of scandals, mis-selling and inappropriate behaviour, it is hardly surprising that consumers are, on the whole,
not engaging fully with the PCA market. Why would you when there appears to be little tangible benefi t
from doing so?
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22 | Competition in Banking
1 CMA, Personal Current Account Market Study update, (18 July 2014), p.73
2 ibid, p.13
3 ibid, p.9
4 Payment System Regulator, Ownership, governance and control of payment systems, Supporting Paper 3 (PSR CP14/1.3), (November 2014)
5 See Which? response to CMA Consultation: personal current accounts and banking services to small and medium sized enterprises, at https://www.gov.uk/
government/uploads/system/uploads/attachment_data/fi le/370929/Which_response.pdf
6 Payments Council, Current Account Switch Service Dashboard: Issue 4: covering the period 1 October 2013 to 30 September 2014, (2014). & CMA, Personal
Current Account Market Study update, (18 July 2014), p.73
7 Which? Consumer satisfaction survey, (March 2014)
8 Which? Consumer Insight Tracker, (June 2014)
9 Which? Magazine, ‘Bank Charges: calculation impossible’, (February 2014)
10 Which?, ‘The Real Consumer experience of 7 day switch: summary research fi ndings of the consumer PCA switching journey’, (March 2014): http://www.
staticwhich.co.uk/documents/pdf/real-consumers-7-day-switch-experience-364351.pdf
11 Which? Current Account Satisfaction Survey, (August 2014)
12 Which? Consumer Insight Tracker, (June 2014)
13 Which? Money, (February 2015), pp.22-24
Changing culture will take time and it is not just about customer service. It goes deeper than that. Cultural
change in the PCA market should mean that banks compete actively with each other to provide clearly
differentiated product and service offerings that are focussed on consumers’ needs and offer value for
money. Again, this is something that retail demonstrates. Lidl, Asda, Waitrose and Sainsbury’s all clearly try
to differentiate themselves in the market and they also compete publicly and vocally on value for money,
for example by price matching their competitors. The banks should learn from this level of competition.
The Banking Standards Review Council have a key role to play here, but the CMA must also recognise that,
to create a truly competitive market, cultural change will be as important as changes to structures and
regulations. Without it, consumers will continue to be badly serviced, disengaged and ultimately worse off
because of it.
Conclusion: there is no silver bullet
The PCA market needs to work for consumers but, currently, it does not.
There is no one-size-fi ts-all solution to how this can be improved. The CMA will need to put in place a
package of remedies to tackle the long-standing failures identifi ed. There are a number of areas where the
CMA should focus: it must put in place solutions that reap the maximum potential from initiatives like
CASS and Midata; play a coordinating role to ensure that the work of all the relevant regulators (the FCA,
PSR and PRA) supports each other; and ensure that the role that cultural change can play is fully explored.
Doing so will ensure that, unlike those that came before it, this inquiry leads to a PCA market that truly
works for consumers.
The goal is clear. The CMA has a golden opportunity to take us there.
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Competition in Banking | 23
14 At 18/12/14 shares in both Tesco and Sainsbury’s were trading at around 40% lower than a year previously.
15 Which? Consumer Insight Tracker, (June 2014)
16 Which? Consumer Insight Tracker, (December 2014)
17 See Which? magazine, (October 2014), pp.16-17
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Competition in Banking | 25
Over the years a lot has been said about needing greater competition in
the UK banking market, even before the fi nancial crisis. We’ve had numerous
reviews, parliamentary inquiries and acres of press coverage. All without an
awful lot of actual change.
Competition: the key to better banking in Britain
by Paul Pester
CEO of TSB Banking Group
ESSAY THREE: Paul Pester
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26 | Competition in Banking
The market has become dominated by large incumbent banks, a trend only exacerbated by the fi nancial
crisis, leading to an ever decreasing focus on what is best for the customer, and products and services that
have become more and more opaque, making it ever more diffi cult for customers to make informed and
confi dent choices about their fi nancial products.
In the aftermath of the fi nancial crisis there is a once in a generation opportunity to change this and build
a banking industry which genuinely meets the needs of British consumers and the wider economy.
Competition is pivotal to delivering on that ambition.
TSB was created for that very purpose: to bring more competition to UK banking.
We don’t see our role as being simply to enter the market and do things in exactly the same way they
have always been done.
TSB’s role – and the real value of having greater levels of competition in banking more broadly – is to be
able to offer customers more choice and therefore deliver better banking for all UK consumers.
As we went about building TSB, we spent thousands of hours talking to customers and consumers about
banking and what they wanted from their bank.
Their views were stark:1
• over 95% of people felt banks put profi t before people
• only 20% of people thought banks treated customers fairly
• and only 1 in 6 people felt banks think about their role in wider society and how they can contribute
positively
What is more, these views are now deeply ingrained in the public’s thinking – they are not a short-term
reaction in the immediate aftermath of the fi nancial crisis.
In 2014 – seven years after the fi nancial crisis took hold – TSB commissioned research from ComRes which
showed that just 10% of people think there has been suffi cient change in the banking sector following the
fi nancial crisis. Those views get worse the further away from London and the south east you get.
So how will competition help turn around these views and ensure the industry best serves the public?
In our eyes, genuinely effective competition will drive a range of positive pressures on the industry. However,
it is the pressure for banks to place customers at the centre of everything they do where the greatest
positive impact lies, with two potential outcomes in particular.
First in culture.
Cultural change will not come about through regulation or Government diktat. Genuine cultural change will
come about because individual businesses understand and recognise its competitive benefi ts.
At TSB we are pioneering a new approach to retail banking based on values, behaviour and experience and it
is this approach that will inform our own individual culture.
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Competition in Banking | 27
For us, good conduct is an investment, rather than a cost and is certainly not seen as a regulatory
requirement. It is a business enhancing driver that is integral to our growth strategy.
That is because good conduct is a way for TSB to stand out and differentiate ourselves in an industry that
is trying to regain the public’s trust in light of recent scandals.
One of the defi ning features of TSB’s culture is our focus on how we behave. It is about service not sales
and moving away from the mindset that led to PPI and other products previously designed for the short-
term benefi t of the bank – rather than customers – and moving to the sort of service that turns customers
into advocates.
We have embedded this mindset into the fabric of our culture by making every member of staff at TSB
a Partner in the business.
When the bank was fl oated on the London Stock Exchange in June last year, all 8,600 employees (no matter
where they work, or their grade) were granted £100 of TSB shares. These shares must be retained and our
employees must demonstrate our clear partnership values if they are to receive any bonus award.
And at the beginning of this year our new remuneration strategy – called the TSB Award – went live. The
award has been designed to refl ect the performance of the Bank and it will typically reward Partners around
10% of their annual salary.
Crucially, the level of the award will be the same for every single Partner in the business, from bank teller to
CEO. What’s more, the TSB Award will not pay out unless the bank is profi table and successfully meets other
criteria which we believe our customers would support.
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28 | Competition in Banking
We believe this approach will mean that each and every Partner is invested in the long-term, sustainable
growth of our bank rather than focusing on short-term risk taking. And it will embed the type of culture
we are seeking to deliver based on values and value – rather than short-term profi ts.
Others may focus on initiatives in slightly different areas, but fundamentally, our research shows that
consumers now see culture and behaviour as critical to their decisions on where they want to bank, so in
a truly competitive market, we will see all banks who want to be successful pursuing initiatives that drive
a genuinely positive culture .
Secondly, we believe greater competition will introduce a much greater emphasis on providing customers
with the power to make well-informed and confi dent choices about their bank and their fi nancial products
and services.
Over time, the intricacies of how banks and their products operate have become less and less apparent,
serving only to add to the mistrust that exists in the aftermath of the banking crisis.
This of course is not the fault of consumers, but the product of an industry that has not had to face the
pressure of genuine competition and think about how to make clear to its customers what the costs and
benefi ts are of banking with them.
We know this is becoming increasingly important for customers because the other set of concerns
consumers expressed when we were designing TSB was that they believed banks, and the products they
offer, had become too complicated. They were mystifi ed by how banks work and as a result felt less
confi dent about many of the products on offer.
We have sought to address this at TSB by explaining to customers how our products work and how we
make our money2 so that people understand the real costs and benefi ts of banking and so that we also
explode the myth that banking is free in the UK.
We believe people have the right to – and should – understand how their bank works. TSB’s Truth
and Banking website helps to demystify how TSB works and how we make money. We believe initiatives
like this are the only way to ensure customers are able to make truly well-informed decisions about
their fi nances.
We have placed transparency and truth at the heart of TSB’s challenger credentials and in a more
competitive market, banks will be forced to be more open and transparent because this is what
customers want.
Conclusion
Seven years on from the banking crisis, consumer confi dence in banking remains low.
A step-change is needed and competition is the key. It is the only way to deliver the kind of banking
customers want and most importantly, they need. And it will be the key factor in ultimately rebuilding
trust in our industry.
Without greater competition, the sector as a whole will not face the pressure it needs to evolve.
With greater competition, the need to provide better products, be open and transparent with customers
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Competition in Banking | 29
and instill the right culture and behaviour, will become priorities for UK banks.
Greater competition will see the balance of power shift to customers – customers who will vote with
their feet if the service and products that their bank offers do not provide them with the required standard,
as they will be safe in the knowledge that they can get a better deal elsewhere.
1 YouGov, (2013)
2 See TSB Truth & Banking website – http://www.tsb.co.uk/investors/truth-and-banking/
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30 | Competition in Banking
The UK banking landscape has undergone signifi cant change in the last
decade. A number of new banks have entered the market; others have been
acquired or forced to divest branches after receiving state aid; while millions
of customers have gone through a fundamental change in how they do their
banking with the growth of digital and mobile banking. But despite these
changes, the competitive forces within the UK banking sector are not driving
better outcomes for customers. Customer satisfaction levels are low, yet
despite the welcome introduction of the Current Account Switching Service
(CASS), customers are not voting with their feet in the numbers you would
expect in a healthy competitive market. As a result, many of the banks get
away with offering their customers a very poor deal – generating billions of
pounds in revenue for themselves as a result.
Transparency can help fi x retail banking
by Benny Higgins
CEO of Tesco Bank
ESSAY FOUR: Benny Higgins
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Competition in Banking | 31
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32 | Competition in Banking
So why is that? Do we need more banks to create more competition? Is it customer apathy – the perception
that all banks are the same and so why bother switching? Is it that customers are very happy with their
bank? Has the current account switching service not done enough to make it easy for customers to move
accounts? Or is it something else? And more importantly, what can we do to make it better for customers?
Over the next 2 years the Competition and Markets Authority (CMA) have an opportunity to address these
questions and we warmly welcome their review. The key issue is to determine what needs to change to make
the sector better for its 49 million UK customers.
So let’s look at the fi rst question posed above – are more banks the answer? Having recently completed
the task of launching a current account we are well aware of how hard it is to enter the current account
market. Any new bank requires signifi cant investment, particularly in the IT costs associated with setting up
well-functioning, reliable systems. Further, new banks must meet stretching capital requirements, as well
as having access to payment systems such as CHAPS, BACS and faster payments either directly or via an
agency agreement. However, these so-called barriers to entry are necessary. Above all else, customers must
be able to trust their bank to be safe and secure and so we would not support regulatory intervention to
signifi cantly lower barriers to entry.
But it would be a mistake to conclude that the introduction of new banks will automatically bring about
more competition and better outcomes for customers. There are many examples of sectors that are highly
competitive with relatively few competitors. The UK supermarket sector being just one good example. And
there are also examples of so called “challenger” banks that have entered the market in recent years that
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Competition in Banking | 33
treat their customers in exactly the same way as the larger, established banks. This only exacerbates the
problem and reinforces the perception that all banks are the same.
Apathy is a key issue. Customers do not see a big enough difference between what the banks are offering
and so they have no real incentive to switch. For example, more than 80% of current accounts do not pay
credit interest. And most of the big banks (and some of the so-called ‘challengers’) have moved to daily
or monthly fees for arranged overdrafts instead of, or sometimes as well as, a standard interest rate. The
banks that use these fees often claim they are simpler for customers, but in reality they are often a hugely
expensive way to borrow – particularly for customers who only dip into their overdraft every so often. This
means that some customers are paying hundreds of pounds more every year for their overdrafts than they
would if they switched to a bank that didn’t use these charging structures. Yet even that is not encouraging
greater switching.
Perhaps customers are actually very happy with their current bank? Well, for some customers that will be
true, but overall customer satisfaction levels are low – particularly for the most established banks. The CMA
reported that customer satisfaction levels routinely sit below 60% for the four largest banks. Furthermore,
even among satisfi ed customers, our research has shown a signifi cant proportion of customers with no
intention of switching to a bank that paid them £45 a year in credit interest (an amount a customer with
the average credit balance among UK current accounts would earn with some of the interest paying current
accounts available on the market). Yet the rapid rise of interest paying current accounts has not led to a
signifi cant increase in switching.
The introduction of the CASS (Current Account Switching Service) has been a big step forward in making
it easier for customers to move banks. Before its introduction switching banks took on average between
18 and 30 working days, with many customers negotiating with both their ‘old’ and ‘new’ bank for over a
month. With CASS, once accepted the process takes seven working days and the customer only deals with
the ‘new’ bank. And since its introduction, there have been an encouraging increase in the number
of customers switching.
While this is to be welcomed and recognised as a necessary step in removing a barrier to effective
competition, the switching numbers are still very low. That may be because customers still perceive switching
to be too diffi cult and there is work to do to continue to raise awareness of the switching service. However,
mechanisms to improve switching can’t and won’t remove the other considerable obstacles to effective
competition, in particular ensuring there is complete transparency in what customers pay to their bank, and
what they receive in return. That is the key issue to ensuring effective competition.
Supermarkets operate in a market where comparability and transparency are the norm. A customer can
easily compare the cost of their grocery shopping and make a choice on where they shop based upon this.
The same cannot be said of the current account market where charges are often hidden, products complex
and the communications to customers are all too often opaque and confusing. And while we acknowledge
that the two markets have signifi cant differences, customers have a right to be able to make straightforward
comparison between products. Without the ability to compare accounts customers will continue to have
relatively low levels of engagement with their current account and switching will remain at low levels.
So what can we do about it? Some have suggested the introduction of mandatory account fees would
remove the so-called ‘myth’ of free banking and encourage customers to shop around. We don’t think that
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34 | Competition in Banking
would be right for customers as, in the absence of increased transparency, it would not drive a better deal
for them and would only cost customers more.
For this market to work, the industry’s collective energy and effort should be directed on ensuring that
customers can quickly and easily understand the value and the cost of a current account to them in simple
and clear terms. If customers had a clear view of how much their bank account really costs them in charges
(particularly for arranged overdrafts), what their banks give them back in return, and what they could be
getting from other providers (as is true in the supermarket industry), I believe far more customers would vote
with their feet – forcing all the banks to work far harder for their customers.
For that reason, we are very supportive of the Government’s MiData initiative. If all banks sign up to it as we
have and make it work, it will be a much needed step in the right direction in providing greater transparency
for customers, making it easier for them to compare current accounts. It is heartening that the big 4 have
signed up and I think every current account provider should be encouraged to do so.
Conclusion
To conclude, it is clear that the banking market is not operating effectively for customers and reform is
required. Although the introduction of the CASS was a watershed moment in the industry, more needs to
be done and the industry must not resist reforms to overdraft charges, fees and transparency to enable
customers to see the true cost of their current account. The CMA has a golden opportunity to take action
that will increase competition in the PCA market. I hope that it is one that will be seized upon as it will
ultimately be to the benefi t of the customer.
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Competition in Banking | 35
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Competition in Banking | 37
The Building Society Sector
Building societies are a vital source of diversity in UK retail fi nancial services,
which is an industry dominated by PLC banks. The top fi ve providers of
personal current accounts, for example, are all PLC banks and collectively
account for around 85% of the market.1 Building societies are strongest in
the mortgages and savings markets (where collectively they hold around
19% of both outstanding mortgage and retail savings balances)2 although
Nationwide has a 6.6% and growing share of the current account market.3
Beyond PLC Banks: Competition through Market Diversity
by Alison Robb
Group Director, People, Customer, Communication and Commercial
at Nationwide Building Society
ESSAY FIVE: Alison Robb
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38 | Competition in Banking
Building societies are mutuals, owned by their members and operated for their benefi t. Most building society
customers are members, with rights to speak at meetings and to vote on how their society is run. Mutuality
is not an arcane technicality of corporate governance: it is fundamental to how building societies do business
and at the heart of the sector’s culture.
As mutuals, building societies do not have shareholders in the same way that banks do. Whereas PLC
banks must strike a delicate balance between serving the interests of customers and those of shareholders,
mutuals have no such obligation and can focus relentlessly on the needs of their members. Without pressure
to satisfy the short-term interest of shareholders, building societies aim for long-term value creation,
optimising (rather than maximising) profi ts in order to ensure solvency, to invest in the business, and to
offer member benefi t.
Building societies’ mutuality makes them inherently customer-centric organisations, which is refl ected
in the higher levels of service, trust and value-for-money that customers attribute to building societies,
compared to banks.4
Challengers and incumbents
Building societies are probably the best known and longest established alternatives to PLC banks in UK
retail fi nancial services. However, there are, of course, other kinds of provider which contribute to the
diversity of the industry. Across the broad spectrum of retail fi nancial services there are, for instance,
electronic payments companies; peer-to-peer lenders; credit unions; monoline insurers; personal loan
and credit card companies; as well as fi rms from other industries that have diversifi ed to offer banking
or payment services (such as supermarkets, manufacturers of electronic devices, and mobile telecoms
operators). As the pace at which new technology emerges continues to increase, we can expect a slew
of new players over coming years, with innovative digital and mobile banking and payment offerings.
So, the industry is populated by a widening range of players with different business models and corporate
forms. An important question, however, is whether these players can challenge the primacy of the large
established banks, exerting on them the kind of competitive pressure that forces the banks to innovate, to
charge lower prices, and to offer excellent service.
In a well-functioning market, you would expect organisations with high levels of customer satisfaction to
grow their market share, while those with relatively lower satisfaction levels should shrink as customers
seek a fairer deal elsewhere. The UK’s retail banking markets, however, do not always seem to work in this
way: specifi cally, the large PLC banks appear to be able to broadly maintain their market shares, despite
their customers reporting levels of satisfaction that are lower than for some of their competitors.5 This fact
suggests that the big banks enjoy what economists call “market power”, which is to say the ability to act in
a way that is not constrained by the usual dynamics of a healthy, competitive market.
The sources of the large banks’ market power may include the economies of scale that they enjoy; the deep
pockets they have for marketing and customer acquisition; and their strong position with new and young
customers (parents are likely to open bank accounts for their children with the same bank that they use,
further strengthening the incumbents’ positions). The extent to which the large PLC banks have and are able
to exploit market power will doubtless be a central plank of the Competition and Markets Authority’s present
investigation into the personal current account and SME banking markets.
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Competition in Banking | 39
Concentration
Adding more providers to a marketplace (or, in the language of economists, reducing market concentration)
is often proposed as a solution to competition problems. Instinctively, the case for more providers seems
fair: surely ten providers of retail fi nancial services must represent more choice for consumers than eight
providers. However, focusing purely on the quantitative (the number of providers) to the exclusion of the
qualitative (the kind of providers) is a mistake. If, in the above example, the two new fi rms offer very similar
propositions to the eight existing ones, how much added choice do consumers truly have?
To ensure genuine consumer choice of the kind that stimulates competition, a marketplace needs
providers to offer different propositions with, for example, one provider leading on price, another on levels
of service, and a third on innovation, allowing consumers to award their business to the fi rm that best
meets their priorities.
Market Diversity
There has been a welcome shift in emphasis recently, recognising that market diversity is every bit as
important as concentration. Andrea Leadsom MP, the Treasury Minister with responsibility for fi nancial
services, said in a speech in September 2014:6
“Building societies are key contributors to diversity within the fi nancial sector… We need diversity among
our fi nancial institutions, because that is what gives the customer choice. We need the customer to have
choice, because that is what promotes competition. And we need competition, because that is what keeps
our fi nancial sector world-class.”
Homogenous markets are the enemy of true consumer choice.7 Where a market is characterised by
providers with similar models, offering similar products at similar prices and with similar levels of service,
consumers will feel no motivation to switch to another provider. In other words, without the credible
threat that customers will leave one provider for another which better serves their needs, the “virtuous
circle” of competition is broken.
Transparency and comparability
So why is the amount of competitive pressure that smaller providers can put on the large PLC banks so
limited? Despite generally offering keener prices and better service, why do the challengers fi nd it so diffi cult
to attract customers away from their larger competitors?
Part of the answer lies in customers’ inability to understand whether they currently have a fair deal, or
whether they would be better off switching to another provider. This inability stems from the fact that
fi nancial products often cannot be easily compared. In personal current accounts8, for example, which
account is best for you (from a pure cost perspective) will depend on how you use the account - whether,
for instance, you maintain a high balance, or use an overdraft, or make regular international payments.
Comparing accounts therefore requires customers to conduct relatively complex calculations based on their
predicted transaction patterns, which is enough to put off most people.
The Government’s MiData initiative is trying to address the challenges faced by consumers when attempting
to compare personal current accounts. The vision for MiData is that it will allow customers to upload their
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40 | Competition in Banking
account data in order to receive a tailored recommendation, based on their own transaction history, on
which accounts would be best for them. Providing the service is properly formulated, MiData could act as
a spur to greater competition. As the service and other new comparison tools are developed, it is important
that they should respect the fact that customers will often be prepared to pay more to receive a better
service; they should therefore assist customers to include factors other than price in their considerations,
such as customer satisfaction and trust levels, and complaint statistics, for example.
The highly regulated environment in which fi nancial services providers operate can reduce transparency and
comparability for customers by adding complexity. Ever more onerous conduct regulation, for example, has
pushed providers to create lengthier and more detailed terms and conditions for their products. When faced
with thirty pages of small print, many customers will simply shrug their shoulders and sign on the dotted
line. As the Chief Executive of the FCA, Martin Wheatley, said in a recent speech:9
“… no-one reads those T&Cs. We simply trust in the good will of the fi rm delivering them. …As a means
of reducing information asymmetries and reducing complexity, mandated disclosure often doesn’t work.”
Regulators now recognise that simply providing customers with ever-more information does not help
them to make good decisions and are increasingly turning to behavioural economics (which combines the
disciplines of economics and psychology) to design interventions that are more effective in practice at
engaging consumers and impacting their behaviour.
Enhanced transparency will bring the pricing and service advantages of mutuality into sharper focus.
However, there is only so far that transparency can take you: the positive impact that mutuals and other
alternatives to PLC banks can have on competition will remain constrained until they can compete with
the banks on equal terms.
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Competition in Banking | 41
1 Competition and Market Authority, Personal Current Accounts – Market Study Update, (July 2014), p.22
2 As at end Q3 2014; Building Societies Association: http://www.bsa.org.uk/statistics/bsa-statistics/
3 Share of main and packaged current accounts; Nationwide Interim Results for period ended 30 September 2014.
4 Building Societies Association: A Manifesto for Financial Mutuals, (November 2014), p.4
5 Competition and Markets Authority, Personal Current Accounts – Market Study Update,(July 2014), p.34
6 https://www.gov.uk/government/speeches/economic-secretary-i-am-very-positive-about-the-future-of-the-building-society-sector
7 As an aside, it is worth noting that, beyond stimulating competition, diversity in fi nancial services performs another important function: it promotes fi nancial
stability. A market with a single business model, fi guratively speaking, puts all its eggs in one basket and is, consequently, highly vulnerable to economic shocks.
A more diverse market will be better able to absorb such shocks as it reduces the likelihood that all parts of the market will be affected.
8 Of the UK’s 43 building societies, 6 currently offer personal current accounts.
9 http://www.fca.org.uk/news/beesley-lecture
10 Building Societies Association: A Manifesto for Financial Mutuals,(November 2014), p.7
Levelling the playing fi eld
The regulatory framework that governs UK fi nancial services is predicated on the PLC model. Building
societies and other corporate forms are not always suffi ciently embedded in the regulatory process from
the outset, and may therefore be disproportionately impacted by regulation. These effects are observable
in, for example, the leverage ratio (a prudential measure which is blind to a fi rm’s risk profi le, so broadly
has a greater impact on low risk institutions such as building societies) and by the more onerous conditions
that apply when building societies raise capital via Core Capital Deferred Shares, than when PLCs issue
ordinary shares.
Building societies are not asking for special treatment, but rather for policy and regulation to be formed in
a way that takes adequate account of all corporate models. To this end, the sector has called for legislation
to create a statutory duty for regulators to foster diversity and to report to Parliament annually on the
effectiveness of competition in fi nancial services, including measuring the level of diversity and the actions
they have taken to promote mutuals.10
Conclusion
Building societies make a crucial contribution to the diversity of retail fi nancial services markets, offering
consumers real choice and the inherent benefi ts that mutuality confers. However, the ability of building
societies to challenge the entrenched positions of the large PLC banks is constrained. While advances in
transparency and product comparability, driven partly by regulators’ adoption of behavioural economics
techniques, are welcome, they can only go so far. To allow mutuals and other non-PLCs to compete with
the large banks on fair terms will require a regulatory framework that takes better account of non-PLC
models and encourages regulators to foster market diversity.
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42 | Competition in Banking
You could argue that it all started to go wrong in 1971. That was when the
Bank of England introduced Competition and Credit Control, a monetary
policy that did the opposite of what its name suggested. Controls over
competition and credit were loosened in accordance with the belief that the
market was the only legitimate determinant of economic outcomes. From
here on, competition was the magic remedy that would lead us to the sunny
uplands of an effi cient, economically useful and customer friendly banking
industry. Unfortunately it has not, and cannot.
What competitioncannot solve
by Tony Greenham
Programme Head, Finance and Business, at the New Economics Foundation
ESSAY SIX: Tony Greenham
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Competition in Banking | 43
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44 | Competition in Banking
The problem with the cult of competition is that, perhaps like any belief system, it seems to have become
a pervasive mantra that sweeps all before it and does not tolerate heretical objections. If we are to judge
from a Bank of England memo at the time recommending the deregulation of credit, its earliest proponents
understood this:
“He who argues for a fundamental change must, to some degree, be preaching a faith. [I believe that]
competition is capable of stimulating effi ciency and innovation …”1
There are at least three reasons why this faith has been misplaced. But before setting these out, let me
be clear that these reasons do not add up to an argument for either monopoly or state control of banking.
We certainly need the right kind of competition but blind faith in competition will not do. We need to
understand precisely where competition is useful, but also what problems it cannot solve.
The self-destructive herd – the fallacy of composition
The starting point is the unique position of banks in the modern economy - banks create money. When
banks extend credit to their customers they inject brand new bank deposits into the economy. Equally, when
they reduce the total amount of credit, they are withdrawing money from circulation.2
This system seems counter-intuitive to many people and most are unaware that the power to create money
was ever delegated by the state to private banks.3 Why does this matter?
The amount of money in circulation is a major determinant of boom, bust and fi nancial stability. Which parts
of the economy get allocated credit has major economic, social and environmental impacts.
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Competition in Banking | 45
But from the point of view of the whole economy, and the public interest, should more credit fl ow to
renewables than fossil fuels? Are SMEs starved of credit? How can we ensure everyone has access to banking
services? These are questions that competition policy cannot answer. Yet the Competition and Credit Control
policy signalled the end of attempts to manage credit creation in the overall public good.
Left to their own devices, competing private banks will allocate too much credit to property and
consumption, and too little to business investment. This is not because they are doing anything wrong
individually, but because of the fallacy of composition - their individually rational actions add up to the
wrong outcome collectively.
For example, it makes perfect sense banks to seek collateral for their loans, and when badly designed
fi nancial regulations under the Basel Accords4 are added to the mix, banks face strong incentives to lend for
property purchases and disincentives for lending to businesses. Rising property prices only reduce the apparent
risk of default for each bank encouraging yet more property lending, even though the risk of a property crash is
increasing overall.
Indeed, the greater the competition in the market, the more fi ercely banks will compete to extend credit
during the boom – exactly the opposite of what is required to safeguard not just fi nancial stability but the
banks’ own fi nancial security.
The number of mortgage providers in the UK increased markedly in the run up to the fi nancial crisis as
oversees sub-prime lenders rushed in, after which they departed more quickly than they had arrived.5
It seems the wrong kind of competition can accelerate boom and bust.
Power corrupts – the problem of information asymmetries
Effective competition is not simply about more fi rms vying for customers’ business. This can be an important
ingredient, but not necessarily the most important. The textbook theory of perfect competition requires a
number of other conditions to be fulfi lled.
For customers to wield market power over suppliers, they need to understand perfectly what they are buying.
This is more diffi cult if all products are different – customers need to be able to compare like with like.
Second, customers need to have full information about the features of the product and all the related and
potential costs associated with it. Third, customers must behave rationally. Fourth, the cost of comparing
and switching products, including the customers’ time and effort, must be low. Finally, the product must be
something the customer buys repeatedly and frequently so they can learn from previous experience and
switch to the best products and suppliers.
No one expects to fi nd these textbook conditions in real life, and lack of perfection does not undermine
the rationale for markets. But we must also not gloss over serious fl aws. Not all markets are equal. The
conditions described above apply rather well to getting your hair cut. Unfortunately they apply very badly
to banking services.
Take personal current accounts, for example. Comparison is made diffi cult by banks bundling current
accounts up with other services such as mobile phone and travel insurance, often as a deliberate marketing
strategy.6 Other banking products exploit well known irrational traits in consumer behaviour.7,8 Teaser rates,
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46 | Competition in Banking
where an attractive initial interest rate changes to an uncompetitive one after an introductory period, are a
widespread example of banks’ exploitation of human frailties. To make competition more effective in these
cases requires more regulation, not less – by banning teaser rates, say, or introducing standard products at a
fi xed prices forcing banks to compete on customer service.
Now consider payment protection insurance, probably the biggest UK mis-selling scandal of all time.9 This
product is purchased very infrequently giving customers no opportunity to learn from past bad experiences.
Information is also highly imperfect and one-sided because the seller enjoys an information advantage over
the buyer.
Such imbalances of power, known as information asymmetries, are pervasive throughout the banking
industry. Finance is a complicated discipline and banks have substantial expertise that consumers often
severely lack.
In such conditions, customers are ripe for exploitation. Competition simply becomes a race by banks to see
who can exploit the most. The cure for misselling is not competition, but structural and regulatory reform -
regulation to improve transparency and punish misselling, and structural reform to change the incentives of
bank staff away from maximising profi ts and maximising customer benefi t instead.
Banking is a trust industry, much like law, accountancy and medicine, where non-expert and potentially
vulnerable clients have to rely on the integrity of the professionals who serve them. It remains to be seen
whether such cultural change is even possible in shareholder-owned corporations.
Choice and diversity are not the same as competition
Which brings us to the fi nal reason why competition is not enough – the need for diversity. Real customer
choice requires a range of different providers, not just a large number of identical fi rms competing fi ercely
to sell exactly the same thing in the same way to the same customers. We don’t need major new challenger
banks if they are going to be the same as the existing ones. What we need are different kinds of banks.
Innovations such as peer-to-peer lending are helping to increase the diversity of business models, but we
need diversity in scale, ownership and geography too. British customers who want to choose a co-operative
or local bank are uniquely poorly served by international standards.10 Diversity is not just important for
choice. An increasing body of academic research shows that more diverse banking systems are more resilient
to fi nancial crises.11
Conclusion: Putting competition in its place
Competition is important, but only in the right context. It was a sign of the times when we closed the
Offi ce of Fair Trading and created the Competition and Markets Authority. Competitive markets are very
far from being suffi cient to produce fair outcomes for customers.
Banking policy should place two fundamental principles alongside the principle of increasing competition.
First, that the nature of banking products means that products must often be highly regulated and fi rms
must demonstrate that they are able to always put customer interests before profi t. Second, the better
measure of customer choice is diversity, not competition.
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Competition in Banking | 47
1 Fforde, J.S., Memo to O’Brien and Hollom, ‘Banking system (and credit control)’, (24 December 1970). quoted in Chick, ‘The current crisis in the UK: a
evolutionary view’, in Harcourt, G. and Pixley, J. (eds) Financial crises and the nature of capitalist money: Mutual developments from the work of Geoffrey
Ingham, (2013)
2 McLeay, M., Radia, A. and Thomas, R., ‘Money creation in the modern economy’, Quarterly Bulletin 54.1 (2014), pp.14-27. and Ryan-Collins, J., Greenham, T.,
Werner, R. and Jackson, A., Where does money come from? A guide to the UK monetary and banking system, New Economics Foundation, (2011)
3 Ryan-Collins et. al., ibid, p11
4 An international regulatory framework for banks issued by the Basel Committee on Banking Supervision at the Bank for International Settlements, http://www.
bis.org/bcbs/basel3.htm
5 Michie, J. and Oughton, C., Measuring Diversity in Financial Services Markets: A Diversity Index, Centre for Financial and Management Studies, Discussion Paper
Series 113, (2013), p.7
6 Wuebker, G. & Baumgarten, J. (n.d.). Strategies against Price Wars in the Financial Service Industry, (n.d.)
7 Dellavigna, S. & Malmendier, U., Contract Design and Self-Control: Theory and Evidence, The Quarterly Journal of Economics, CXIX(2), (2004), pp.353-402,
retrieved from http://elsa.berkeley.edu/~sdellavi/wp/ContractDesignQJE04.pdf; Ausubel, L., The Failure of Competition in the Credit Card Market, The American
Economic Review, 18(1), (1991), p.50-91. retrieved from http://socsci2.ucsd.edu/~aronatas/project/academic/ausubel%20on%20cc%20monopoly.pdf
8 Offi ce of Fair Trading, What does behavioural economics mean for competition policy?,(2010), p.14 retrieved from http://webarchive.nationalarchives.gov.
uk/20140402142426/http://www.oft.gov.uk/shared_oft/economic_research/oft1224.pdf
9 There were an estimated £50bn of these products sold over a 10 to 15 year period, see http://www.fi nancial-ombudsman.org.uk/contact/PPI-your-case.html
10 Prieg, L., Greenham, T., Stakeholder banks: the benefi ts of banking diversity, New Economics Foundation, (2010)
11 Haldane, A., May, R., Systemic risk in banking ecosystems, in Nature 469, (2011),pp.351–355, Goodhart, C. Wagner, W., Regulators should encourage more
diversity in the fi nancial system, Voxeu (2012) http://www.voxeu.org/article/regulators-should-encourage-more-diversity-fi nancial-system
Of course competition can be benefi cial, but if we do not pay attention to the problems that it cannot
solve, and adopt the right strategies to solve them, an obsession with competition might instead make
matters worse.
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48 | Competition in Banking
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Competition in Banking | 49
Recently, it has been rare for a week to go by without receiving a research
report or event invitation on the topic of customer-centric business models
and how to create one. This theme is selling seats like hot cakes in the
banking sector right now. And refl ecting on the banking market revelations
of the last few years, it is perhaps not hard to see why.
Why building long-term relationships with satisfi ed customers delivers competitive advantage
by Anders Bouvin
CEO of Handelsbanken UK
ESSAY SEVEN: Anders Bouvin
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50 | Competition in Banking
This emphasis seems aimed at helping answer a single, central question: how can you turn customer service
to competitive advantage? This might appear, at fi rst, to be a perfectly reasonable question. But I cannot
avoid turning this question on its head and instead asking: under what circumstances, in retail banking, could
focusing consistently on customer service not result in competitive advantage?
I have often felt a similar confusion when reading press commentary about cultural change in banking and in
response to the idea that the particular initiative being reported should be seen as a PR or CSR step by the
bank in question - a short-term, required step towards public rehabilitation. This seems, to me, to imply that
any longer term, more deeply entrenched programme of improving customer service would act as a drag on
profi tability, rather than a key driver of sustainable commercial success.
I’m not sure why or from where this idea of a confl ict between customer service and competitive edge
gained currency. But it certainly does not tally with our own experiences of running a profi table bank
over many decades. For us, the core principles of running a successful bank have always been simple and
evident, even if adhering to them in practice takes constant focus, self-discipline and fi ne-tuning throughout
our organisation.
Whilst a bank is foremost part of the service industry, it is also different from many of the organisations
that make it up, because the services we provide deal with important customer commitments that require
dependable fi nancial support long into the future. For example, support to ensure a business can develop
new and better products, make more of them or sell them into new markets; and support to enable an
individual to establish long-term fi nancial security for their family.
For us then, it follows that to succeed in a world of long-term commitments we must strive every day to
strengthen and deepen the relationships we have with our customers. And naturally it also follows that, in
order to develop these lasting relationships, we need to maintain an unwavering focus on customer service.
Knowing and understanding our customers, and being able to satisfy their individual needs, is absolutely
the key to long-term success for our business. Our everyday obsession with forging broad, strong and lasting
customer relationships based on service excellence has led to Handelsbanken being more profi table than its
market competitors for each of the last 42 years. And this in turn has resulted in strong, sustained growth in
the Handelsbanken share price over many years. Since the fi nancial crisis alone, our share price has increased
by 112 percent.
I don’t suggest here, by any means, that the distinctive model I am about to describe is the only way to
achieve both high levels of customer satisfaction and profi table business. But it works for us and we are still
learning and tweaking the model as we go along. After all, four decades is not such a long time in business.
Since we operate a values-led management model, it makes sense for me to explain our way of thinking fi rst.
Our idea of how we should run a successful bank is rooted in trust and respect for the individual; an
unshakeable belief in people and in their desire and ability to do good things well. Based on this belief, we
have developed an operating model that devolves decision-making power to our branches and to staff in
other areas of responsibility throughout the bank. This is made possible through a strongly decentralised
organisational structure.
In practical terms, each of our branches operates as a small business working to a “church spire” principle.
This means that our branches only bank those businesses and individuals in the community they are present
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Competition in Banking | 51
– i.e. in the area you can see from the top of the local church spire. This enables each one to make decisions
locally and provide a service that is truly tailored to the individuals and businesses in their community.
It is no surprise then that our British expansion has been caricatured as a Captain Mainwaring comeback.
Indeed, we do offer customers the kind of bespoke, community banking that many remember from the days
before service became centralised and depersonalised.
Yet our approach is distinctive in many other ways too, from our fi nancial prudence and stability, to our focus
on relationships rather than transactions. For more than four decades we have managed our bank through a
framework of core principles, which include prudence, thrift and long-termism.
Chief among these principles is that business success comes from having satisfi ed customers. And since our
local branch employees are best-placed to understand and satisfy our customers’ needs, the bank entrusts
virtually all decisions to them, from credit assessment to product terms and pricing. Head Offi ce’s role is
merely to support our branches’ efforts to serve their customers as well as they can, and to help ensure the
fi rm framework of principles within which we must all operate are well understood.
In order for our branches to be able to focus fully on customer satisfaction, we have steered clear of
working with volume targets or sales campaigns, and of the fi nancial incentives used to meet them. Instead
of bonuses, all staff share in the long-term success of the bank through a profi t-share scheme known as
Oktogonen. For every year the bank is more profi table than our competitors, a portion of this ‘additional’
profi t is foregone by our shareholders and invested into Handelsbanken shares on behalf of each employee.
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52 | Competition in Banking
This is of the same monetary value right across the bank - from the administrative assistant to the branch
manager - while the accumulated allocations and capital growth cannot be claimed by any staff member
before they reach 60.
This profi t-share scheme steers us all to take prudent decisions today with long-term risk and customer
outcomes in mind. And having met our one corporate goal – of being more profi table than the average of
our competitors in each and every year, for the past 42 years – we have found that such prudence translates
into both profi table and sustainable business.
It is precisely because we are all working to the same customer satisfaction goal, and because staff
throughout the bank are trusted and expected to make all the important decisions concerning their
‘patch’, that we have achieved these results. Handelsbanken has been ranked top for customer loyalty
and satisfaction for the past six years, in an independent survey of UK individual and corporate banking
customers. This is a position the bank has held in its birthplace of Sweden since such independent
surveys began back in the late 1980s.
The predictability of our model also contributes further to our fi nancial strength: in their most recent
assessment, Bloomberg Markets ranked Handelsbanken one of the world’s strongest banks for the fourth
year running; the bank retains one of the highest credit ratings of any in Europe, and our capital ratio far
exceeds the more stringent requirements being introduced across Europe.
Demand for the genuine local relationship banking that Handelsbanken has offered for several decades
remains strong and growing across Great Britain. Customers place a high value on the ability to speak to
someone at their branch who knows them personally and whose dir